Background paper QCA review of irrigation prices. Expenditure update Changed regulatory period

Transcription

1 Background paper QCA review of irrigation prices update Changed regulatory period September

2 Contents 1 Introduction Operating cost updates Insurance premiums Price path extension year Unders and overs balances revenue cap schemes Conclusions

3 1 Introduction In January 2011, SunWater submitted its Network Service Plans (NSPs) to the Queensland Competition Authority (QCA). These NSPs presented SunWater s proposed expenditure over the regulatory period 2011/12 to 2015/16. In June 2011, the QCA Ministers issued an amended referral notice to the QCA that required it to recommend irrigation prices for the 2012/13 to 2016/17 period. SunWater does not propose to amend the NSPs as lodged to the QCA, as this change in period does not materially impact upon its proposals. However, some new information has arisen, some of which were previously foreshadowed in those NSPs and/or to the QCA. This paper sets out these proposed changes, which are limited to the following: updating insurance premium costs, over the new regulatory period, and setting out forecasts for the 2016/17 year (Section 2); and updates to the unders and overs balances in SunWater s revenue capped schemes to 1 July 2012 (Section 3). This paper does not discuss updates to the electricity cost forecasts, as this has been discussed in a separate paper submitted to the QCA. SunWater acknowledges that the opening Annuity Restoration Reserve (ARR) balance at 1 July 2012 and the renewals annuity will need to be recalculated, and proposes that this be done following the QCA s draft report based on more current information, and in accordance with the QCA s recommendations about matters affecting the ARR (e.g. unbundling the previous balances). In addition, information relating to a number of additional major renewals projects is coming to light that will affect the scheme based annuities. These include: replacement of inflatable dams on four weirs; remediation works to the Palm Tree Creek value in the Pioneer River WSS; completion of the Marian weir outlets works upgrade in the Pioneer River WSS; St George pumpstation replacement, and Final estimates of flood damage repairs. SunWater will submit expenditure forecasts and supporting information on these projects as soon as reports are completed, however this will not be prior to the deadline for the QCA s draft report. 3

4 2 Operating cost updates Since January 2011, a number of cost changes have eventuated that were previously foreshadowed to the QCA, namely insurance premiums and electricity costs. Electricity costs have been addressed in a separate paper to the QCA, and hence this section focuses on changes to insurance costs An additional year of operating expenditure also needs to be set to reflect the change in period. These matters are discussed below. All costs are expressed in $2011, consistent with the terms applied in the NSP. 2.1 Insurance premiums SunWater had indicated that it expected insurance costs to increase significantly for 2011/12 in response to the flood events of 2010/11. These increases are now known, with SunWater having recently concluded its procurement program for insurance for the 2011/12 year. SunWater has also corrected some anomalies discovered in the allocation of insurance costs, including: the inclusion of premiums for project insurance into the NSP operating costs this error was the cause of the anomaly for Eton identified by Deloitte in their review of administration costs. These project insurance costs have now been removed from the insurance cost forecasts as they will be recovered as part of the actual costs of renewals and other projects as they occur; and adjustments to the asset values applied in the Lower Mary scheme for apportioning insurance costs - some of the Lower Mary bulk water asset value was incorrectly assigned to the distribution system. This meant that bulk water insurance costs were understated by approximately $2k in the previous figures. In aggregate terms, the insurance costs allocated to the NSPs have increased from $2.973M to $3.204M. The actual changes for each water supply scheme and distribution system are set out in the table following. In general, the costs have increased by around 10%, although; increases are less in those schemes that previously included a project insurance component (now removed). In some cases, the project insurance was significant (i.e. Bowen Broken, Eton and Mareeba bulk water) and its removal has resulted in a net decrease in the insurance premium. 4

5 Table 1 - Updated insurance costs ($2011). Service Contract NSP Revised Revised Change ABB - Burdekin Water Supply Bulk 271, , , % ABP - Proserpine Water Supply Bulk 80,895 90,355 88, % BBB - Bundaberg Water Supply Bulk 90, ,856 98, % BBL - Lower Mary Water Supply Bulk 7,325 9,660 9, % BBR - Barker Barambah Water Supply Bulk 75,185 83,972 81, % BBU - Burnett Water Supply Bulk 61,408 68,513 66, % BBY - Boyne Water Supply Bulk 50,626 56,468 55, % IBH - Chinchilla Weir Water Supply Bulk 5,837 6,503 6, % IBM - Maranoa Water Supply Bulk 5,160 5,747 5, % IBN - Cunnamulla Weir Water Supply Bulk 2,191 2,457 2, % IBS - St George Water Supply Bulk 37,707 42,129 41, % IBT - Macintyre Brook Water Supply Bulk 66,414 73,364 71, % IBU - Condamine Water Supply Bulk 63,922 71,205 69, % KBB - Bowen Broken Water Supply Bulk 49,981 49,141 47,942 96% KBE - Eton Water Supply Bulk 112,592 80,316 78,357 70% KBP - Pioneer Water Supply Bulk 89,619 93,639 91, % LBC - Callide Water Supply Bulk 129, , , % LBD - Dawson Water Supply Bulk 44,693 49,841 48, % LBF - Lower Fitzroy Water Supply Bulk 11,518 12,850 12, % LBN - Nogoa Water Supply Bulk 182, , , % LBT - Three Moon Water Supply Bulk 34,708 38,732 37, % MBM - Mareeba Water Supply Bulk 106,812 85,874 83,779 78% AIE - Burdekin Irrigation Distribution Dist 344, , , % BIC - Lower Mary Irrigation Distribution Dist 40,920 44,538 43, % BIG - Bundaberg Irrigation Distribution Dist 474, , , % IIS - St George Irrigation Distribution Dist 44,433 49,580 48, % KIA - Eton Irrigation Distribution Dist 119, , , % LIT - Dawson Irrigation Distribution Dist 21,371 23,633 23, % LIW - Emerald Irrigation distribution Dist 92, , , % MIM - Mareeba Irrigation Distribution Dist 254, , , % Total 2,972,579 3,284,123 3,204, % Insurance premiums shown above are the 2011/12 actual values deflated by 2.5% to show these costs on a $2011 basis. SunWater s forecast of insurance is that premiums will not increase in real terms over the price path (i.e. at CPI only), despite the rate of increase experienced for the 2011/12 year being well above CPI. 5

6 2.2 Price path extension year The tables below set out the proposed operating expenditure for 2016/17 (in $ ). These costs have been derived from the following assumptions, consistent with those used for the preceding years: Materials and contractors increase by 4%; Electricity costs increase by CPI only, however SunWater has prepared a submission on electricity costs that presents an alternative forecasting methodology allowing for the estimated increases in electricity prices due to the BRCI increases, including the impact of carbon pricing; and No increase in real terms for other costs (i.e. they increase at the rate of inflation). The 2017 forecast costs presented below are extracted from the same model used to produce the NSPs. The data in this model has not been altered since the NSPs were produced in January 2010 and therefore the cost forecasts shown below do not include the proposed changes in forecast electricity and insurance costs and will need to be adjusted for these changes before the data can be used to calculate prices. Table /17 Bulk Water Operating ($2011) Operating costs for the first seven bulk water service contracts: by Activity Barker Barambah Bowen Broken Boyne Bundaberg Burdekin Callide Chinchilla Item Operations Electricity (outdated forecast*) Preventive maintenance Corrective maintenance Revenue offsets by Activity Operating Costs* * There is a proposed change to electricity forecasting methodology being considered by the QCA that will reflect the estimated real increases in electric by Type Barker Barambah Bowen Broken Boyne Bundaberg Burdekin Callide Chinchilla Item Labour Electricity (outdated forecast*) Materials Contractors Other Indirects & Overhead Revenue offsets by Type Total Operating Costs* * There is a proposed change to electricity forecasting methodology being considered by the QCA that will reflect the estimated real increases in electric Barker Barambah Bowen Broken Boyne Bundaberg Burdekin Callide Chinchilla Recreation-Commercial Operator Payments Rent Received Land Leases Other Charges & Fees Flood Mitigation Access charge Total

7 Operating costs for the next seven bulk water service contracts: by Activity Lower Cunnamulla Dawson Eton Fitzroy Lower Mary Macintyre Maranoa Item Operations Electricity (outdated forecast*) Preventive maintenance Corrective maintenance Revenue offsets by Activity Operating Costs* * There is a proposed change to electricity forecasting methodology being considered by the QCA that will reflect the estimated real increases in electric by Type Lower Cunnamulla Dawson Eton Fitzroy Lower Mary Macintyre Maranoa Item Labour Electricity (outdated forecast*) Materials Contractors Other Indirects & Overhead Revenue offsets by Type Total Operating Costs* * There is a proposed change to electricity forecasting methodology being considered by the QCA that will reflect the estimated real increases in electric Cunnamulla Dawson Eton Lower Fitzroy Lower Mary Macintyre Maranoa Recreation-Commercial Operator Payments Rent Received 0 Land Leases Other Charges & Fees Flood Mitigation Access charge Total

8 Operating costs for the remaining eight bulk water service contracts: by Activity Three Moon Creek Burnett Condamine Mareeba Nogoa Pioneer Proserpine St George Item Operations Electricity (outdated forecast*) Preventive maintenance Corrective maintenance Revenue offsets by Activity Operating Costs* * There is a proposed change to electricity forecasting methodology being considered by the QCA that will reflect the estimated real increases in electricity prices. by Type Three Moon Creek Burnett Condamine Mareeba Nogoa Pioneer Proserpine St George Item Labour Electricity (outdated forecast*) Materials Contractors Other Indirects & Overhead Revenue offsets by Type Total Operating Costs* * There is a proposed change to electricity forecasting methodology being considered by the QCA that will reflect the estimated real increases in electricity prices. Mareeba Nogoa Pioneer Proserpine St George Three Moon Creek Burnett Condamine Recreation-Commercial Operator Payments Rent Received Land Leases Other Charges & Fees Flood Mitigation -167 Access charge Total

9 Table /17 Distribution Operating ($2011) by Activity Bundaberg Burdekin Dawson Eton Lower Mary Mareeba Nogoa St George Item Operations Electricity (outdated forecast*) Preventive maintenance Corrective maintenance Revenue offsets by Activity Operating Costs* * There is a proposed change to electricity forecasting methodology being considered by the QCA that will reflect the estimated real increases in electricity prices. by Type Bundaberg Burdekin Dawson Eton Lower Mary Mareeba Nogoa St George Item Labour Electricity (outdated forecast*) Materials Contractors Other Indirects & Overhead Revenue offsets by Type Total Operating Costs* * There is a proposed change to electricity forecasting methodology being considered by the QCA that will reflect the estimated real increases in electricity prices. Bundaberg Burdekin Dawson Eton Lower Mary Mareeba Nogoa St George Drainage Levies Drain Diversion Charge Other Charges & Fees Land Leases Termination fees Access Charge -536 Total Table /17 Transfer Costs from Distribution Systems to Bulk Water (for relevant schemes; $2011) Bulk Water Cost Transfers Bundaberg Burdekin Lower Mary Pumpstation & Main channel cost allocation

10 3 Unders and overs balances revenue cap schemes A revenue cap applies in three bulk water schemes: Bowen Broken, Cunnamulla and Macintyre Brook. These revenue cap balances were set out in each NSP. These balances were based on the balance as at 1 July 2010, being the latest information available. SunWater has updated this forecast, based on the actual balance at 1 July 2011 and assuming that the revenue for the 2011/12 year will equal the target revenue for the scheme. This means the only adjustment to the 1 July 2011 balances will be an additional year of interest on that balance. The table below provides a summary of the calculation. Table 5 Unders and Overs Balances for Revenue Cap Schemes Scheme Actual balance at 1 July 2011 Assumed variance from revenue target Interest rate Interest Projected balance Bowen Broken -27, % 2,667-30,336 Cunnamulla Weir 10, % 1,016 11,556 Macintyre Brook -65, % 6,308 71,741 Note: interest is applied in accordance with the approach documented for the current price paths i.e. the Commonwealth Bank Corporate Overdraft Reference Rate monthly charging cycle less 1%. This rate is set on 1 July each year. Refer to p16 of SunWater Irrigation Price Paths - Final Report. 10

11 4 Conclusions SunWater is required to provide operating expenditure forecasts for the additional year of the regulatory period and this data is provided in the above tables. SunWater has drawn the additional year of forecast data from the same model as the earlier NSP forecasts and presented these in the same format as shown in the NSPs. Some forecasts costs, namely insurance and electricity, have been reforecast based on more up to date information however these reforecasts have not been included in the NSP tables and once agreed, will need to be brought into the data sets presented above before they are used for calculating revenue requirements. 11